Society and Culture, Education

Student loan interest rate drama — it’s back, in a limited engagement!

Image Credit: Shutterstock

Image Credit: Shutterstock

Just when I thought we might avoid a second annual edition of the “student loan interest rate follies,” a handful of lawmakers stepped up to the plate and set the stage for a sequel last week. That’s the beauty of sunset provisions: Like clockwork, they provide our public servants with an opportunity to set bipartisanship aside, whip advocates into a frenzy, and then save the day at the last minute. Why let an opportunity go by?

A quick refresher: Back in 2007, Congress set the stage for an interest rate crisis in  June 2012 by passing a law that incrementally reduced the interest rate on subsidized Stafford Loans until it reached 3.4% in 2011-2012. But the law also called for the lower rate to expire on July 1, 2012, at which point it would revert to the original 6.8% in 2012. (This is how policymakers keep the costs of proposed policies down… by pretending that they will be temporary).

Last year, in what my colleague Rick Hess aptly labeled a “panderfest,” politicians from both parties stumbled over one another to keep the interest rate where it was for another year. The fix cost $6 billion and saved the 1/3 of borrowers with subsidized Stafford loans $9 a month. Inspiring public policy it was not.

What would happen this year was anybody’s guess. Until President Obama released his budget last month, that is. The budget proposed tying student loan interest to the market rate — the 10-year T-bill plus 0.93% on subsidized Stafford, plus 2.93 on unsubsidized — and fixing that rate over the life of the loan (like a fixed-rate mortgage). It did not call for a cap on interest rates (to the dismay of student advocates). The proposal was remarkably similar to one from Republican Senators Tom Coburn (OK) and Richard Burr (NC) last year (though the Coburn-Burr proposal put the same rate on subsidized and unsubsidized loans). The stage seemed set for a bipartisan push for a market-based rate.

This week, though, a flurry of activity from both parties and in both chambers suggests we may be in for some fireworks yet.

Freshman Senator Elizabeth Warren wins the prize for the looniest proposal, under which students would pay the same interest rate that banks do when they borrow from the Fed’s discount window for short periods of time — currently 0.75%. Brookings scholars Matt Chingos and Beth Akers called the proposal a “cheap political gimmick,” while the Daily Beast’s Megan McCardle called it a “populist values statement: we like students, we don’t like banks.” I’m not sure the CBO has scored the cost of Warren’s proposal yet, but it’s also possible that they tried and it broke their computers. I promised political theater, right?

(Meanwhile, Warren’s colleagues Dick Durbin (D-IL) and Jack Reed (D-RI) proposed tacking it to the 91-day Treasury rate, plus a percentage to be determined by the Secretary of Education, up to a predetermined cap (6.8 for subsidized Stafford)).

These Senate proposals are likely noise. What really matters is how much daylight exists between Senate HELP committee chair Tom Harkin and the Chair of the House Ed and Workforce committee, Rep. John Kline. Right now, the gap seems pretty wide.

Sources suggest that Harkin is not keen on the market-based proposals and thinks lawmakers should pass another temporary fix until the reauthorization of the Higher Education Act. According to Inside Higher Ed, Harkin wants to keep the rates at 3.4 for another 2 years (at a cost of $8.3 billion).

House Republicans disagree, and have proposed a solution that seems like it could have some legs. Like the president’s budget, it would tie the rate to the 10-year Treasury bill. But it would also allow that rate to vary each year over the life of an individual loan, place the same rate on subsidized and unsubsidized loans (T-bill plus 2.5 for both), and set a cap at 8.5 for Stafford loans. In a rare shout-out to the president, the committee’s press release suggested that there was “common ground” between the budget and the Republican’s proposal.

What’s going to happen? Hard to say. Kicking the can down the road for another two years would be a costly mistake, and Republicans seem likely to hold fast to a market-based approach. But the most interesting dynamic may be between the White House and Senate Democrats. One scenario is one in which the president sides with Senator Harkin on the temporary patch but calls for a market-based rate to be written into the next Higher Education Act reauthorization.

That would likely leave us where we’ve been so often these days: In the middle of an inter-chamber bargaining game that runs up to the deadline. Are you not entertained?

One thought on “Student loan interest rate drama — it’s back, in a limited engagement!

  1. Apparently Ms. Warren believes that low risk lending and higher risk lending should be priced equally. Why not price ALL loans the same? Sam’s Sushi Palace could borrow at the same rate as Ford Motor Credit does, AND we could do away with Moody’s, S&P and other debt raters. What could possibly go wrong here?
    Where did Ms. Warren get her financial training? Oh, that’s right — Harvard.

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